Using the Resource-Based Theory to Determine Covenant Not to Compete Legitimacy

54 Pages Posted: 1 Aug 2011 Last revised: 22 Dec 2013

See all articles by Norman Bishara

Norman Bishara

The Stephen M. Ross School of Business at the University of Michigan

David Orozco

Florida State University - College of Business

Date Written: April 1, 2012

Abstract

This paper addresses the legitimacy of competing interests involved in the enforcement of covenants not to compete (“noncompetes”). To date, the courts and legislatures have not relied on a principled theoretical framework to identify and assess the competing interests between firms and individuals in this setting. This paper fills the research void by providing a theoretical framework that identifies the legitimacy of these competing claims. The framework integrates managerial research involving the resource-based theory of the firm and the knowledge-based perspective of competitive advantage with the legal analysis and enforcement of noncompete terms. A descriptive framework of the parties’ competing interests provides four discrete scenarios, which formalizes the types of legitimate interests a court must balance when asked to enforce noncompetes. From this descriptive account, a prescriptive analysis is advocated that uses an ownership approach to assess the legitimacy of an employer’s claim to knowledge covered by a noncompete.

Keywords: covenant not to compete, noncompete, resource-based theory, resource-based view, restrictive covenants, human capital law and policy, employment law, employment contracts

JEL Classification: J2, K1, K12, K2, L2, M1, M12, M5, M51, M55, O15

Suggested Citation

Bishara, Norman D and Orozco, David, Using the Resource-Based Theory to Determine Covenant Not to Compete Legitimacy (April 1, 2012). Indiana Law Journal, Vol. 87, 2012, Ross School of Business Paper No. 1157, Available at SSRN: https://ssrn.com/abstract=1900873

Norman D Bishara (Contact Author)

The Stephen M. Ross School of Business at the University of Michigan ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-647-6823 (Phone)

David Orozco

Florida State University - College of Business ( email )

423 Rovetta Business Building
Tallahassee, FL 32306-1110
United States

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